The Market for NFT Digital Collectibles: Hype or Blockchain Bonanza?

From June 23 to June 30, 2021, Christie’s auction house will be auctioning artwork from 18-year-old trans artist FEWOCiOUS, real name Victor Langlois. He has five lots going on sale, each representing a year of his life as he discovered his gender identity between ages 14 and 18.  His digital artwork is considered groundbreaking, and so too is the form in which it is being auctioned – as non-fungible tokens or NFTs.

Much like FEWOCiOUS, NFTs have burst on the scene in the past year, making it possible for people to own and collect digital goods. And it’s so much more than artwork; NFTs allow people to buy digital moments, including the original video footage of blocked shots in basketball games, and even social media memes. In May, for example, 21-year-old Zoe Roth sold the popular “Disaster Girl” meme in which she was featured as a child for nearly $500,000. The meme was stamped with digital code that marked its authenticity, thus rendering it a unique NFT.

‘Humans Understand Scarcity’

Simon Taylor, co-founder of 11:FS, a company at the forefront of digital financial services, recently joined the popular Wharton Fintech podcast to help demystify non-fungible tokens and explain the energy that is driving this passion economy for people who are into everything from digital art to cryptokitties. Taylor described the NFT craze through the example of NBA Top Shot, a platform that allows sports fans to buy, sell and trade numbered versions of specific, officially licensed video highlights, fueling the NFT “moment marketplace.”

“A fungible token is where if I give you a dollar and you give me a dollar back, nothing has changed,” Taylor explained to Wharton Fintech host Ryan Zauk, an MBA candidate at the Wharton School. “But if I give you the original Mona Lisa and you give me a copy of the Mona Lisa…you win in that deal. So, the Mona Lisa is non-fungible and the dollar is fungible, because it has an equivalence of value…What’s the digital equivalent of the [Mona Lisa example] that’s really hot right now? Baseball cards. The whole sports memorabilia space is just absolutely on fire. NBA Top Shot comes along and says, ‘You know what’s better than a baseball card? 10 seconds of NBA history.’ You can own the original 10 seconds time stamped by the NBA…just a little bit special…Humans understand scarcity and will pay more for one of the original 10. Somebody may leak that and copy it, but it doesn’t mean those original 10 don’t have value. That’s exactly what is happening in non-fungible tokens. People are getting really excited by buying these original scarce things…The people who are buying that stuff are not buying it to be part of the crypto economy. They’re buying it to be one of the only people who owns that rare, unique moment.”

As Taylor suggested, NFTs are digital assets in the so-called crypto economy, which includes cryptocurrency like Bitcoin, tokens and, most importantly, blockchain. Blockchain technology, a digital ledger that records who owns what in the virtual world, makes the market for NFTs possible. Kevin Werbach, a Wharton professor of legal studies and business ethics and an expert in blockchain, has said, “Blockchain is a new structure of trust…a decentralized kind of database where there’s not one actor that controls it.” Each unique, digitally-coded NFT (and the ultimate name of its owner) is stored on the blockchain. And an NFT’s value can fluctuate, just like stocks. Often, it depends on how much someone is willing to pay for it.

“NFTs are a unit of data stored on a blockchain, used to commodify digital assets such as art,” notes Sarah Hammer, managing director of Wharton’s Stevens Center for Innovation in Finance, which launched The Blockchain Laboratory to research blockchain and cryptocurrency. The Stevens Center, says Hammer, recently awarded funds to a professor to do research on the NFT marketplace. “I expect there will be a lot of evolution in the NFT marketplace as the legal rights and capabilities around the technology continue to evolve,” she adds.

“Will speculative investors push the prices of NFTs to unfathomable heights or will it serve its original purpose of helping artists to sell their pieces of art and make ends meet?” — Laksana L.R., NFT Market Watcher

The music industry is especially watching that evolution because NFTs’ money-making potential could signal big bucks for musicians who have seen their profits erode with the demise of the CD and digital downloads.

In March, Kings of Leon was the first band to release an album as an NFT. When You See Yourself had three available digital tokens for NFT collectors, including a special album package, live show perks like front-row seats for life, and exclusive audiovisual art. The band reportedly generated more than $2 million from the sales.

During a recent visit to to Wharton Business Daily radio show on SiriusXM Ch. 132, John Fleckenstein, COO for RCA Records, spoke to host Dan Loney about the potential of NFTs for the music industry.

“Anything that is a business reliant on intellectual property rights, in particular in the digital space, this is a potential game changer,” noted Fleckenstein. “Everybody’s question right now is are we in the 1990s-era dot-com [bubble] version of NFT and it’s going to be years before it settles into a robust business model, or is it going to happen overnight? The noise of what we did with Kings of Leon was clearly very loud given it was the first time anybody’s put an album with an NFT, but the kernel of what an NFT means for us is exciting. Our industry has gone from a place of where you physically had to buy a piece of music to consume it, to a world where you could get music anywhere you are, anytime of the day, whenever you want with zero barriers to entry through streaming. This all of a sudden offers up the idea of bringing scarcity to the digital space, which is exciting for us.”

Yeti Toys, Tweets and Jacob Collier

NFTs have captivated the world’s youth, who are into the emerging crypto economy (people use bitcoin and other cryptocurrency to purchase NFTs) and the latest digital, finance-related trends.

“I am interested in NFTs because they have many different applications and potential in this digital world we are living in and growing in. It’s the cool factor of saying, ‘Look what I got! This is the only one like this in the world,’” says Cohen K., a high school student from Washington state who is participating this summer in the Wharton Global Youth Program Future of the Business World online course. Cohen is launching a business around NFTs, though he is reluctant just yet to share details.

“I would invest in an NFT because these first NFTs are pieces of history,” adds Cohen, whose father purchased an NFT of the VeVe app in the form of a yeti toy that uses augmented reality. “NFTs are written history, but instead of handwritten they are written through code.” One of Cohen’s favorite NFT moments in recent months? Twitter CEO Jack Dorsey selling his first tweet as an NFT for more than $2.9 million.

The NFT hype has already cooled somewhat in a matter of months, though many people are still following the moment marketplace and figuring out how they can profit from it. Inspired by Cohen’s NFT fascination, we decided to check in with some of the students who participated in our 2020-2021 Wharton Global High School Investment Competition to learn about their interest in NFTs and where they think this market is headed. Here’s what a few of these aspiring investors (all of whom made it to this year’s Top 50 semifinal round) had to say:

“I am interested in NFTs because I am keen on observing how society will treat this new asset class. Will speculative investors push the prices of NFTs to unfathomable heights or will it serve its original purpose of helping artists to sell their pieces of art and make ends meet? I guess I’m drawn to the uncertainties behind NFTs.” – Laksana L.R., 16, Indonesia

“NFTs are interesting because the creation of a market for digital collectibles that give buyers true legal ownership of a video, piece of artwork, etc. is simply unprecedented…The only concern with NFTs is whether or not investor confidence will continue to stay at current levels. NFTs are similar to cryptocurrencies in that they are much less accepted than the dollar. Even if confidence wanes in the dollar, it won’t lead to a crash simply because of how many users there are but, as evidenced by Bitcoin’s latest drop from 56k to 34k, cryptocurrencies, and potentially NFTs, have more volatile price changes. Nevertheless, I would invest in NFTs because the market is clearly there, and if I can purchase a few assets that have potential to grow in value, I wouldn’t pass it up.” – Vedant K., 17, U.S. 

“One has to understand that the sole reason there is any demand in the NFT market is because it’s an NFT; similar to why people went bonkers subscribing to IPOs [Initial Public Offering] of any dot-com company – because it was a dot-com. People are willing to buy any NFT, made by a celebrity or the like by shelling out thousands, if not millions of dollars. But, as the craze over NFTs fizzles out, the value attached to a lot of them will also erode. We do believe the NFT market will still be present 20-30 years from now, but will be much more sober. History shows that whenever something new is introduced, especially in the financial context, investors or rather speculators overestimate its value because of the trend associated with it, only to realize that the value is no more, as trends are finite.” –Team Bullseye, 17, India

The four members of Team Bullseye from Bangalore, India, believe NFTs are an inflated bubble that is likely to pop.

“I was first introduced to NFTs when my favorite artist Jacob Collier put a poll on Instagram asking if his fans wanted him to create and sell NFTs. As a die-hard fan, I wanted to get hold of whatever it was, but I went in and did some research about what an NFT was in the first place, so that I could convince my parents to buy it for me. NFTs really piqued my interest because it helped artists sell one-of-a-kind artworks, whose value can never be matched… One downside of NFTs is that Ethereum [the most actively used blockchain] is extremely energy hungry, leading to climate change — the exact thing we are working to solve. One story I read on the news gave shocking numbers: one NFT took up electricity that could power up a family home for two months. If a solution to sustainable energy can be found for computers to do large computations, I think more people will become open to the idea of trading NFTs, and the market can grow. I think NFTs are a great idea of investing while promoting creative work, so I would definitely invest in a couple NFTs supporting my favorite artists!” –Amita S., 17, U.S.

“In March 2021, the news about Christie’s auction for virtual art by the artist Beeple drew me toward researching NFTs. Given that the artwork sold for nearly $70 million, I was curious to know why NFTs held such significant value and how they worked… NFTs are exchanging at overinflated values; however, that doesn’t mean they’re a bubble going to explode. NFTs are here to stay.” –Gaurav S., 16, Nigeria

Conversation Starters

Are you following the market for NFTs? Do you think the interest and investment in them will grow? Share your thoughts in the comment section of this article.

Amita S. says, "One downside of NFTs is that Ethereum [the most actively used blockchain] is extremely energy hungry, leading to climate change." What are your thoughts about this? Would it prevent you from actively engaging in the NFT marketplace?

Like NFTs, what new technology has captivated your attention and why?

8 thoughts on “The Market for NFT Digital Collectibles: Hype or Blockchain Bonanza?

  1. I would like to point out the following. First, for those who are still confused as to what an NFT is, imagine this scenario. You walk into the Louvre and look at the Mona Lisa. Someone walks up to you and offers to sell the Mona Lisa to you. You decide to buy the Mona Lisa for, if nothing else, the sheer novelty of it. The person then takes your money and walks off. When you try to ask where the Mona Lisa is and why you don’t have it in your hands, they say that you didn’t actually purchase the Mona Lisa, you purchased a little sticky note saying you own the Mona Lisa that is posted in a very specific, very obscure broom closet, that nobody will ever come across unless given specific directions. They then offer you a cardboard rollup of the Mona Lisa that was surplus from the gift shop.

    Second, introducing scarcity to the digital platform is an impossible task, as by virtue of everything being made of code, you can pretty much just download/copy anything that was put anywhere with the right know how. While you could say that the purchase of an NFT gives you some sort of title, such as “Sole Owner of the Disaster Girl meme” such a title is backed by nothing, because anybody can just take a look at the picture of the Disaster Girl meme and download it, depriving the purchaser of a material advantage, and nobody is going to care that you spent over $500000 dollars on an image. Thanks for coming to my TED talk.

    1. Firstly, I have to thank you for the excellent explanation of an NFT. The analogy you made with the Mona Lisa really does highlight the nature of an NFT, reminding people that many NFTs are intangible. I would definitely agree to this point and hope it helps others understand just what an NFT is.

      Your second point is regarding the impossibility of scarcity to the digital platform, arguing that it being fully digital makes scarcity impossible. You continue, replying to the “Disaster Girl meme” example mentioned in the article, by contending that the person who purchased this NFT gained nothing but a useless title. To this point I tend to disagree- in the modern world where digital assets (such as virtual currencies in the gaming field) are intangible and are often unexchangeable for real money, virtual systems prompt users to psychologically (and voluntarily) value digital assets like society places on the dollar.

      Furthermore, the concept of setting up a psychological feeling of value is how society eventually normalized exchanging a 2.6×6.1 inch piece of paper with a “10” on it for a pizza downtown. Tangible currencies like the dollar are finite due to environmental degradation and economic inflation, which is a trend also existent in NFTs (blockchains release large amounts of carbon like cited in the article and can also lead to inflation/overproduction), governments and NFT-creators dictate values based on user demand. With the rising demand for NFTs, it begs the question of if these valued digital assets can rise in monetary value like new companies such as Team Bullseye is hoping. After all, NFTs are unique and can hold a digital scarcity in part due to tokenization.

      In conclusion, I’m cautiously supportive of the growth of NFTs. On the pro side, NFTs are a relatively novel concept that many have yet to discover, offering large margins of profit. Additionally, it can promote crypto/online currency payments (like Paypal) which in turns reduces habitat destruction that is associated with paper money production. However, it has some cons like contributing to the carbon emission total and has the potential to be remotely stolen/hacked. Overall, I do believe NFTs are promising for the future and think the article and your comment have interesting and competing points.

    2. You make several insightful points regarding NFTs. Investing in NFTs may not seem reasonable, given the extreme hype and ease of replicating the original asset. While I’m also cautious of this new technology, I think its future applications are worth considering. When NFTs started to become popular, they were primarily utilized as highly priced digital art, GIFs, videos, and even simple pictures. The viral Nyan cat GIF that I remember from my early middle school days, for example, was sold as an NFT for almost $600,000! Even though I could easily copy this GIF and it may seem like an “impossible task” to bring about scarcity, NFTs could become much more than just digital collectibles. Consider the transition from physical paper to computers. Computers provide added features that enhance the process of recording, storing, and sending information. We can imagine NFTs in a similar light — with more features and uses, NFTs may become a worthy investment.

      Even now, NFTs can be used as digital concert tickets. Such perks can greatly improve the careers of aspiring musicians by allowing fans to more easily support them. NFTs also provide improved ways to pay artists. For every new purchase of their work, an artist receives a royalty, and as their work appreciates over time, they continue to benefit.

      NFTs make transactions more efficient, quick, and secure, given their dependence on blockchain technology. No third party is required to conduct transactions, and blockchains record transactions, so the information stored cannot be altered. There have been several instances where physical sports memorabilia was copied, and the copies were thought to be original and were sold at extremely high prices. With NFTs, we can at least track the transaction history back to the original creator. The ease of transactions and relatively secure technology could potentially allow NFTs to function as ownership of cars, land, and even patents of inventions. That “little sticky note saying you own the Mona Lisa” could transform into something much bigger than an art fad.

    3. Thanks for your insightful ideas, Alfred. I completely agree with you on the fact that anyone has the ability to view and share the NFT, but I disagree that this takes away the value of the object. Many people can view an original Monet, or maybe own a print in their home, but not many people can say they own a Monet in their home.

      NFT’s have what we call “hedonic value”, as compared to functional value. Hedonic value is the value a person gets from the feelings of fun and “coolness” they receive from something, where arousal and sensory stimulation occurs. Despite being a digital world, we run on hedonic value. Marketers use this when thinking about selling their product, as to how they can create “social currency” (the idea that people will buy/share things that will improve their status). Many rich people have the “social currency” of being able to brag they own a Monet, but I have no social currency by opening Google and purchasing a print of a Monet. Even having the code for an original Monet is more valuable and has more social currency than a copy Monet, if we’re in the realm of NFT’s. Consumer societies are directed largely by the accumulation and consumption of material goods. You spoke briefly about a “lack of material advantage”. The material advantage doesn’t need to exist, the social currency and participation in a consumer society (and the associated pleasure with that) is enough for someone to value NFT’s.

      NFT’s also have something called “Biographical Indexicality” which means it has value the same way collectibles have value, because they index our life in relation to a time in history.

      If NFT’s were to lack value, it would actually be due to the fact that we can’t touch NFT’s, rather than the lack of it’s functional value. This fits in perfectly well with a philosophical/consumer psych viewpoint on the subject. The need to examine products “haptically” (by touch) is driven by our intrinsic motivations, such as hedonic value (Peck and Wiggins, 2006). For example, Apple has in-store iPads that allow us to touch and use the object, which can improve our idea of it’s functional value as well as help bring us closer to pacifying the need for hedonic value, which may lead consumers to make quicker decisions in purchasing the product. We can define this as a “Need for Touch”. We can easily hypothesize that the “Need for Touch” might reduce the value of NFT’s than initially expected, especially because the Need for Touch did not push consumers towards making “unique” purchases (Vieira, 2013). It’s interesting to see how marketing and consumer psych can make the case for how NFT’s will and will not become more valuable as time goes on.

      I enjoyed everyone’s insightful replies about the value of NFT’s from a economic perspective. I chose to view this discussion through a philosophical/marketing and consumer psych perspective because they are my interests. Thank you Alfred for your intriguing reply and thank you KWHS for this interesting article.

    4. Alfred, I really appreciate your comment so much, as it speaks worlds to me and so many others as smaller artists as we try and implore people to understand our view. I could not have asked for a better understanding of what an NFT is and just how pointless it is. Alfred, your explanation about the Mona Lisa caused me to think about an important factor of being a small artist: commissions. It was quite likely that the Mona Lisa was a commission, and many small artists like myself, and even larger artists rely on commissions in order for customers to spread a good word about our work, or to support themselves. NFTs have a huge impact one how people see commissions.

      It isn’t easy to get an audience of people who actively support your artwork. Just the pure joy of seeing even 1 or 2 likes on an art post is never a repetitive or boring feeling. All of that hard work for one piece, and finally, finally, someone is acknowledging your skill and effort with their singular like. It is an incredibly refreshing experience, especially for smaller artists. So when I heard of NFTs, I thought this would be beneficial for small artists. After all, it seemed no different from accepting a commission and making your customer the sole owner of the piece, right? Wrong.

      When NFTs started blowing up, you would see famous and successful idols selling. The ‘Rick Roll’ music video was being sold as an NFT. In fact, an NFT of Chadwick Boseman was held for auction in his honor at the Oscars. The Real Oscars. And just as Alfred mentioned, in our digital world today, there is nothing that is going to tell the purchaser that they are the “Sole Owner of the Chadwick Boseman Oscars Art Piece” besides their own mind. So not only does it do Boseman a great disservice by remembering him with something so fleeting and insincere, it also shows how primarily famous people (in this case a nationally famous awards event) are benefiting from NFTs.

      NFTs take away from art commissioned by artists who may be struggling to live, because why would someone buy an art piece when they could buy Jack Dorsey’s first tweet because it’s ‘original’ and they will be the ‘sole owner’, like there aren’t hundreds upon thousands of screen shots of that exact same first tweet. When you tell someone “Yea dude I paid 2.9 million to be the original owner of Jack Dorsey’s first tweet!” they are 1) most likely going to look at you in shock and 2) ask you why in the ever loving world would you pay 2.9 mil to own someone else’s tweet. Bluntly put, just as Alfred did, nobody is going to care that you spent so much over a tweet or an image anybody can make. The only difference is the 2.9 million paid towards an already rich man rather than the 100 dollars paid for a full body character commission from an artist who needs to pay rent or buy food. Overall, I just cannot see the point of NFTs primarily because of how it affects smaller artists and Alfred’s point about our digital platforms of today.

  2. First of all, we cannot deny the hot and rapid growth of the NFT market. The data shows that the NFT market transaction volume at the end of 2020 was 250 million U.S. dollars, and the transaction volume in the first quarter of 2021 exceeded 2 billion U.S. dollars. Like Bitcoin, NFT is also composed of code, but it is irreplaceable. Bitcoin, Ethereum, and Dogecoin are similar to those produced in the assembly line in a factory. But each NFT has its own uniqueness. The investment behavior for NFTs is not completely rational, but investing in NFTs can be profitable in the foreseeable future. But like Bitcoin, NFT transactions will be affected by government regulation. This kind of regulation will be a huge negative for NFT. Just as the trading and production of Bitcoin encountered increased supervision by various countries, the price plummeted, causing a liquidation. NFT trading also has this risk and disrupts the financial investment market. A large amount of energy consumption will increase the conflict between NFT traders and environmentalists. At the same time, the government’s energy restriction measures will increase the cost of NFT and raise the barriers to entry. In general, I think NFT has become a potential investment opportunity. But from a rational point of view, the risk of investing in NFT is still high.

    1. Thank you for your comment. While I agree that NFTs provide a good investment opportunity and will be affected by government regulation, it isn’t necessarily a bad thing.

      Firstly, let’s acknowledge that NFTs are currently a speculative investment, so risk is unavoidable. From the risk perspective, there is both systematic risk(of the blockchain technology market) and idiosyncratic risk(of NFTs). For example, the owners of africrypt, an online crypto exhcange, defrauded investors of 3.6billion in bitcoin. Similarly, the NFT marketplaces have the same systematic risk. Furthermore, each individual NFT, which are generally artwork, can fluctuate in price drastically due to different “hedonic values”, which Mehtaab B. has already given an excellent explanation.

      With government intervention, the efficiency of the market can be increased and risk mitigated. For example, using listed and regulated exchanges(such as coinbase for crypto) can reduce the risk of tunnelling of the exchange owners and reducing external costs, increasing efficiency. While it is undeniable that regulation also reduces the appeal of decentralization, I would reason that as NFTs are a new type of product, therefore what is more important is consumer confidence in NFT. In the infancy of this technology, regulation can provide confidence in NFTs, leading to an increase in investment of NFTs, increasing popularity in NFTs and bringing external economics of scale such as reduced gas fee. As the benefits outweigh the downfalls of centralization, in the early days of blockchain technology, NFT trading will be benefited from regulation, and price fluctuations may be reduced while popularity grows.

      For the sustainable development problem, recently ethereum has been shifting from a proof of work(PoW) to a proof of stake (PoS) system, reducing energy consumption by up to 99%, tackling the outrageous energy consumption problem. This will lower the barrier of entry and prove NFT and smart contracts to be a sustainable method of exchange. In the long run, I believe this sustainability will create a healthy eco-system for NFT. As more investors come in, artists can thrive while energy consumption remains low. As time goes, NFT will then be proven to be beneficial to society while also promoting a sustainable system of blockchain (as opposed to PoW of the bitcoin system), giving it a competitive edge.

      While NFTs alone are a big thing, it is merely a glimpse of the bigger picture. Only viewing NFT from an investment and risk perspective is not enough. The NFT market is only a small part of the blockchain economy. I am a firm believer in the prominence of blockchain. From a personal perspective, as bigtech like Facebook continues to abuse user data for advertisment, privacy will become top priority for users, giving opportunity for blockchain’s peer to peer capability to protect user data. From a social perspective, as fears of hyperinflation continues to loom, NFTs and cryptos can be a better storage of value than the USD. From a global perspective, distrust in authority is destined to grow and a decentralised economy is an imminent trend, blockchain technology will be an indispensable element in our lives. While NFT and blockchain technology is still in its craddle, I am very positive on the outlook of it. Yes, NFT may be experiencing a bubble. Yes, there maybe too much regulation in the long term. However, I believe the inherent market demand for blockchain technology will steadily improve the flaws in NFT and blockchain. 

      Thank you again for your insight and KWHS for the amazing content

      1. I agree with you. I think you are right to be optimistic, especially during the epidemic. During the epidemic, governments adopted loose monetary and fiscal policies and invested a lot of money, for example (according to Sina Finance) The U.S. issued more than 4 trillion U.S. dollars in currency from 2020 to March 2021, which has led to flooding of market liquidity and means inflation. The value of cash is shrinking, and the emergence of NFT has given excess funds an opportunity to resist devaluation.

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